an indicator discussion...

Thought it was about time we had an indicator setup discussion thread on here since most of the regulars on here are TA fans. I don't expect people to give away their trading systems here but more as a place to bounce around idea's, setups and methods of reading what is displayed on your screen/s. I'll chuck a few thoughts up here to start the discussion and add some more later as the discussion gets rolling (hopefully).

So what are indicators?

I look at them as a mathematical representation of the market. They can be based on a few parameters like price, volume, market depth, time etc. Depending on what parameters are used, the view of the market can be completely different.

How are they used?

Indicators can be used as a basis for a trading system, a common sense alert system or making a complex view of the market simple to interpret.

Why use them?

If used correctly indicators can be a great tool for any trader, used poorly, they will loose you money like a fire in a bank vault.... hang on that doesn't work, vaults are air tight and have sprinkler systems...

Anyway... onto some examples.

Most novices, (myself included) start out with charts looking something like this.

or perhaps

All the usual suspects are there. MAV's, Bollinger bands, momentum oscillators, candlestick patterns, even ones called Ultimate Oscillators.

So do they work? In a word.... no. If they worked well, why sell them? Like most things in this industry, if someone is selling you something, it probably only makes them money. And if it's free, it's an attempt to sell you something later, or take your money. Most indicators included in basic charting packages are used by so many people that they can be used more effectively in reverse than in the way they are intended. Also combining a bunch of them like in the above examples, makes a sensible trading decision almost impossible. Do that on a few time frames and the decision tree becomes so complex it wold take a week just to write down all the possibilities, let alone figure out a way to use them.

So how to use indicators effectively? In my experience they should be very simple to read. In the heat of battle, interpreting something correctly is greatly reduced so the easier you make this job, the better your trading decisions will be. Of course there are many ways to do this and that is the point of this thread. I personally find colours work for me. If something is a sell, I colour it red. if it's a buy, I colour it a nice shade of blue (weird I know, but my eyes find green objectional)

I find I have to define how I am using the indicator. If it's a common sense type (i.e. showing a longer time frame trend) I place it on a chart that isn't used for trading decisions.

Another thing, what's wrong with using price as an indicator? A higher time frame price chart is just as good as any indicator in my experience as it forces you to watch the big picture.

Here's an example of a multi time frame setup.



Also making time a variable rather than a constant is equally valid. Range charts do this by making the price change a constant and then time becomes the variable. Volume charts also change the way a given period of trading action is displayed. Ticks chart are different again.

Here's an example of a 4 tick range chart applied to the Euro Stoxx futures with a custom momentum indicator applied. Notice the time axis isn't linear but the price moves are easy to read. Consolidation is compressed in time as the chart only updates when price is moving.



If I have written an indicator as a system, and I intend to base decisions on it, I give the system it's own chart. That way I find it easy to treat the system as a single entity. The example below actually has two systems on it but you can see how easy it is to differentiate between them. Colours, position and different methods of display on a chart can also make them much easier to read.



There are as many ways to read a market as there are people doing the reading. The way YOU read it should be YOUR edge. No one else will define it for you.

This thread is the place to throw idea's around, post multi monitor screen shots, learn from others and figure out what works you...